Five charged in house 'flipping' scheme

A Des Moines attorney and four businessmen have been charged with bank fraud stemming from what prosecutors say was an illegal home-buying scheme that netted them more than $400,000 in profit.

A federal indictment unsealed last week accuses businessmen Nathan Smith and Patrick Steven of using two companies they owned to buy houses from banks at prices below market rate and then selling the homes for a profit. In total, they used the scheme to buy and sell 18 houses in the Des Moines area, according to the indictment.

The tactics the men used made it appear to banks that the houses bought in short sales were less valuable than they actually were, the indictment said. This allowed the men to maximize their profit.

Between March 2009 and March 2011, Smith and Steven used one of their companies, Iowa Loan Modifications, to help homeowners negotiate short sales with banks, the indictment said. Short sales happen when a homeowner owes more in debt than can be acquired by selling the home and a bank agrees to accept the lower amount.

After helping see the short sales through, Smith and Steven used their other company, Iowa Short Sales, to buy the houses, the indictment said. They quickly sold the houses for a profit — called a "property flip" — despite bank rules and federal regulations designed to stop the practice.

Des Moines attorney Jason Springer joined the scheme by closing the sales and being paid commission for each sale, the indictment said. Springer, licensed to practice law in Iowa in 2002, practices real estate and personal injury law with Springer & Laughlin Law Office, according to the firm's website.

Real estate agent Rick Makohoniuk helped with the sale of at least one Des Moines house and was paid a commission, the indictment said. Urbandale mortgage broker Jerod Hogan used his company's letterhead to produce fake documents that claimed to banks that Smith and Steven were approved for financing that they had, in reality, not secured, the indictment said.

Smith and Steven used a variety of tactics to keep banks from catching on to the "flips," including giving banks letters that said certain homes had been on the market, according to the indictment.

The indictment lists Wells Fargo, Bank of America, U.S. Bank, CitiMortgage, GMAC Mortgage and JPMorgan Chase as victims of the scheme.

"Smith, Steven, Springer, Makohoniuk and Hogan employed material falsehoods, concealed material facts and omitted material facts in order to deceive lenders and defraud them of money," the indictment said.

In one case, Steven, Smith and Springer had a homeowner in the midst of negotiating a short sale place the home in a trust controlled by Steven and Smith, the indictment said. The group then purchased the home in the short sale in the trust's name, without the bank knowing that Steven and Smith had "dual roles."

In order to stop property flipping, some banks require parties to sign affidavits showing that property buyers and sellers have no business relationships or an "arrangement to resell the home at a higher price," according to the indictment. Smith gave affidavits that falsely claimed the buyer and seller in short sales were not connected, the indictment said.

Steven, Springer, Makohoniuk and Hogan are set to be in court for initial appearances and arraignments on Friday, according to online court documents. Nathan Smith is scheduled to be in court on Aug. 29 for a plea hearing.

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WHAT ARE SHORT SALES?

Short sales happen when a homeowner owes more debt to a bank than the sale of a home would generate. In a short sale, a bank agrees to take the money from the sale, even if the amount is lower than what the homeowner owes.

Short sales are seen as a way to avoid foreclosure on a home, which can lower its property value, as well as values of nearby houses, according to a 2011 USA TODAY report. The National Association of Realtors has argued that short sales should be easier to complete. They're often delayed while a house's value is decided, the group's website says.